It's Getting Closer And Closer To Game Over For Argentina

Pirated boat aside, it's become increasingly clear in the last 24 hours that if Argentina loses some small legal battles, the country risks default.

Bloomberg's Katia Porzecanski reports that it could happen as soon as next month if things don't go the Argentina's way.

The problem is that the country is embroiled in a long legal battle with investors (including hedge fund manager Paul Singer) who bought Argentine sovereign debt in 2001, the last time the country's economy collapsed. Since then, investors have been given two chances (in 2005 and 2010) to restructure that debt and take a haircut.

Singer, who is owed $1.3 billion, refused. Instead, he and others have taken the country to court (and impounded one of Argentina's naval vessels) for the full amount they're owed. Argentina says it will pay investors who restructured, not the "vulture" investors (exchange bondholders) who did not.

Last month, Judge Thomas Griesa ruled that Argentina cannot do that, regardless of their bellicose statements, and must honor the payment schedule below in December (from Reuters):

On Dec. 2, Argentina is scheduled to make a $42 million interest payment to some bondholders who exchanged defaulted sovereign debt for new bonds in one of the country's restructurings in 2005 and 2010. Exchange bondholders are due another $3 billion on Dec. 15 and between $100 and $200 million on Dec. 31.

Now here's what could tip the scale toward an Argentine credit event.

So far, Judge Thomas Griesa has granted Argentina a stay so it doesn't have to pay Singer and co. the full amount they're owed during Court proceedings. What Griesa really wants is a signed affidavit that the country will pay bondholders in December.

There's a chance President Cristina Fernandez de Kirchner won't sign such a document since she's made this issue an "us vs. the vultures" political rallying cry. And as Citi forecasted, "If no affidavit is signed by Argentina, it could be game over, with the stay lifted even before the payment on the Global 17s."

But there's another possibility that could trigger a lifting of the stay as well.

Meanwhile, the situation in Argentina is getting dire. It's getting increasingly expensive for the country to issue debt (from Bloomberg):

The cost to insure Argentine debt against non-payment for one year soared 4,181 basis points, or 41.81 percentage points... The inversion the so-called credit-default swap curve, in which short-term contracts become more expensive, is “a sign of distress,” according to Jane Brauer, a strategist at Bank of America Corp...The implied probability of default within 12 months has more than quadrupled from less than 10 percent before Oct. 26, based on the assumption investors will recover 25 percent of the par value of their bonds.

This year, Argentina has seen the biggest protests since the regime of Juan Peron in the 1970s. Cristina Fernandez de Kirchner's popularity is dwindling, and politicians are struggling to control capital flight.

For now it seems there's little the regime can do but wait ... and stall.